Dividend changes are coming
For Limited Company contractors, it’s all change with dividends come April 6. The need to gross up a dividend will be withdrawn, meaning the amount you receive is the amount you will be taxed on. Your dividends will instead be subject to a new dividend tax.
But what is this tax and how will it affect you?
In this blog our Director of Accounting and Tax, Janna Beeching takes a deeper look into what’s to come and more importantly, what you can do before April 6 to minimise the impact on you and your business.
The new dividend tax
The first £5,000 of dividends will be taxed at a nil rate, and will therefore be tax free. Subsequent dividends will be taxed at 7.5% where they are within the basic rate tax band, 32.5% for those in the higher rate band and 38.1% for those in the additional rate band.
The new rules will increase the amount of tax payable above the nil rate compared with 2015/16, but there are opportunities to mitigate this.
A dividend can be challenged by HMRC if the proper paperwork is not in place. This could mean that a dividend is treated as salary or loan. The paperwork is very simple and consists of a Director’s Resolution and a dividend voucher. Templates should be easily obtainable from your accountant.
Director’s loans (current account)
If you are owed money from your company it may be better to take a repayment from the company rather than dividends that are taxable at higher rates of income tax. But, for 2016/2017, the new dividend tax rules (above) means that you should consider this carefully.
If your loan remains outstanding more than nine months after the end of the company’s accounting period you will incur a tax charge. Taking loans should be carefully managed to avoid unnecessary or unforeseen tax liabilities.
Post 6 April 2016, loans are likely to become more frequently part of your income planning. Talk to your accountant to understand why.
So what should you do now to prepare?
Consider dividends before 6 April 2016. Careful planning now to make use of the allowances and basic rate band will maximise the dividends that can be paid before 6 April. This might offer the opportunity to accelerate a dividend before the new tax comes into effect.
What all contractors should be doing is looking at how their company is structured and whether or not there are missed opportunities to have different classes of shares or additional shareholders to minimise the tax you pay.
Your accountant can discuss these matters with you. Here at Intouch we offer a personal assessment to identify whether opportunities exists for you. We offer services for clients and non-clients so please contact us for more information and a fixed price.
For a more comprehensive understanding of what’s to come for dividends, download our free ebrief: Changes to dividends: what do they mean for you?
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.